Common misconceptions about bankruptcy

Having literally represented several thousand clients in successful bankruptcy cases in the last 35 years in California, I have distilled the common misconceptions about bankruptcy into the following:

1. Will debtor go to jail for filing bankruptcy?

NO. The debtor will not go to jail for filing bankruptcy provided he or she is an honest debtor. An honest debtor is one who truthfully discloses his/her financial affairs, income and expense, assets and liabilities in his/her bankruptcy petition. An honest debtor does not hide the facts in his/her petition and testimony that materially alter information regarding his/her financial situation. Suffice it to say that most debtors are honest in bankruptcy so most debtors do not have to worry about going to jail.

Sometimes debtors go to jail because they committed a bankruptcy crime. For example, the debtor declared in his/her bankruptcy petition that he does not own a house. But the truth is that someone is on the title to a house with a large equity that actually belongs to the debtor. The debtor’s name does not appear on the title but the one on the title is merely holding the house in trust for and for the benefit of the debtor who is the true owner. Let’s be more specific. The statement of financial affairs of the petition asks if there is anyone who holds any assets in trust for the debtor. The debtor answers that there is no such person. However, upon further investigation, it turns out that debtor’s mistress, Ms. Bimbo, lives in a house in Bel Air that debtor paid for in cash two years ago. Ms. Bimbo admits that the house she lives in is owned by the debtor because she has no money of her own to buy the house. Ms. Bimbo testifies that the debtor asked her to sign a declaration that she is merely holding title to the house for and on behalf of the debtor who is the true owner of the house. By hiding this transaction, the debtor has committed a bankruptcy crime, therefore he is looking at jail time. Further, the trustee will file an adversary case to get the house into the bankruptcy estate.

Honest and truthful debtors get a fresh start in life without debt and become productive citizens again while keeping most if not all of their assets. This is the purpose of bankruptcy law. Honest debtors can look forward to a new and happy life after filing for bankruptcy. They keep their income, house, cars, retirement accounts and most everything else they own with applicable exemptions. Yet they get rid of all unwanted debt. Many successful people have gone through bankruptcy at one time or another in their lives. Walt Disney filed for Chapter 7 bankruptcy twice before his famous mouse became a successful business venture. Henry Ford filed for Chapter 7 bankruptcy in 1903 but pushed on thereafter to become the biggest car manufacturer in America. Milton Hershey who established the chocolate factory with products that world loves to eat so much filed for Chapter 7 bankruptcy before his chocolate business became successful. And of course, Pres. Trump is no stranger to bankruptcy. His companies have filed for bankruptcy four times during the nineties. His casinos failed and could not pay hundreds of millions of debt. Even Orange County filed for bankruptcy reorganization not too long ago. And several Catholic dioceses filed for bankruptcy reorganization to handle the child molestation lawsuits that hit the church with $600-M of liabilities. It was Lucifer’s handiwork, no doubt.

2. Will debtor be able to borrow money again after bankruptcy?

YES. Most car dealers will finance a car purchase right after debtor obtains his discharge. In fact, debtors do get offers to finance car loans even while the bankruptcy is going on. Clients usually bring me flyers mailed to them saying that their pending bankruptcy is no obstacle to buying a car in the dealership. They ask me if that is true or a scam. I tell them it’s true. The interest rate will be higher than someone with good credit. Some clients ask if they can buy a house after bankruptcy. The normal wait is two years. Two years after discharge you can get a mortgage to buy a house. There are lenders who advertise that bankruptcy is no problem to buying a house. Of course, again, the interest rate will be higher than someone with good credit.

There are also companies that specialize in providing credit cards to debtors who have just come out of bankruptcy. These normally have a yearly fee and higher interest. Within a couple of months after obtaining a discharge, these offers of new credit cards will start coming into your mailbox. I always suggest clients take these cards, use them, but pay them in full every month, just so they can start rebuilding their credit scores faster

YES. Life after bankruptcy is great! No more monthly minimum credit card payments to suck up your disposable income. You can start saving money again. Keep your disposable income for your family and yourself. No more pressure for credit card payments. Or, become wildly successful as Walt Disney and Milton Hershey! If they can do it after bankruptcy, you can do it too!

3. Will bankruptcy affect a debtor’s immigration status?

NO. Immigration status has nothing to do whatsoever with bankruptcy. It is the debtor’s income that has something to do with immigration status. If you are in the process of getting a green card, what you need to do is show enough income, or if you are short on income, you have to get a relative who is either a permanent resident or citizen who has enough income to vouch for you with an affidavit of support. If you claim government benefits within a certain period of time after getting your permanent resident status, Uncle Sam will be able to claim these benefits back from your relative who executed the affidavit of support. Of course, if you are asked during the interview if you have filed bankruptcy and you have, you just have to answer truthfully. Bankruptcy is not and has never been a legal ground to deny an immigrant permanent residency.

Deportation defense

Under the Trump era, getting deported by ICE is your problem if you do not yet have legal status. Have a contingency plan. Be ready to post bail. Have the money ready for bail. Get the money from your credit card. Make sure you discuss what needs to be done to defend you from deportation with your lawyer. You might qualify for deportation relief.

Disclaimer: The foregoing is an expression of opinion and is not meant to be legal advice to any reader. There is no attorney-client relationship established by this article with the reader. If you want to discuss your situation, you have to set an appointment to consult with Attorney. First general consultation is free.

“IN HIM WE HAVE REDEMPTION THROUGH HIS BLOOD, THE FORGIVENESS OF SINGS, ACCORDING TO THE RICHES OF HIS GRACE.” — EPHESIANS 1:7